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UK government raises Ogden discount rate by less than expected

The Ogden discount rate will rise to -0.25% from -0.75% following a government review

Insurance
The higher the Ogden rate, the less insurers have to pay out as a lump sum

UK insurers will have to pay out less to people who are seriously injured in motor accidents after the government raised the so-called Ogden discount rate.

The Ogden discount rate, used to calculate how much accident victims should be given as a lump sum, will rise to -0.25% from -0.75% following a government review.

However, this was less than the range of between 0% and 1% predicted by analysts.

The discount rate corresponds to the return victims should expect from investments. 

The higher the Ogden rate, the less insurers have to pay out as a lump sum as it assumes better annual investment returns for those amounts.

In 2017 the government cut the Ogden rate from 2.7% to -0.75%, which sparked outrage from insurers whose profits were hit by the move.

The government launched a review in response to lobbying from insurers and announced the new rate on Monday. 

The changes will be implemented on August 5 and the rate will be reviewed again within five years.

Bad outcome for insurers

"This is a bad outcome for insurance customers and taxpayers that will add costs rather than save customers money,” said Huw Evans, director general of the Association of British Insurers.

“This will remain the lowest discount rate in the Western world, leaving England and Wales an international outlier at a time when we need to boost our attraction to international capital,” Evans said.

Shares in insurers Admiral Group PLC (LON:ADM), Direct Line Insurance Group PLC (LON:DLG), RSA Insurance Group PLC (LON:RSA) and Aviva PLC (LON:AV) were little changed after the announcement. 

Good outcome for claimants  

The Association of Personal Injury Lawyers welcomed the new discount rate.

“The government has faced sustained pressure from the insurance industry to set a rate which would not be appropriate for injured people, who should not be forced to take any risk with their investments,” president Gordon Dalyell said.

Frenkel Topping, an independent financial advisor that provides asset protection for vulnerable clients, said it sees the change as an opportunity to secure new clients. 

Mark Holt, Managing Director of Frenkel Topping said: "So many of our clients who have suffered life-changing injuries are low risk investors who are in financial drawdown from the moment they receive their compensation, and we reiterated this point with the Ministry of Justice during the consultation process."

Car insurance premiums rose by 3.5% in the second quarter of 2019, according to the latest Confused.com Car Insurance Price Index in association with Willis Towers Watson. UK motorists are now paying £789 on average, £37 more than a year ago, the data showed. 

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